The Philippines’ unique geographic position flanking key global and regional trade routes, combined with its historical ties to the US, provide the country with a unique advantage in the competitive global transport and logistics sector. One of the country’s largest trading partners remains the US, although the Philippines has also been able to capitalise on strong regional growth recently by increasing its trade with important regional players including China, South Korea, Japan, and other ASEAN and APEC nations.
Unfortunately these same distinctive geographic qualities also pose serious challenges for the transport sector, with the country’s 100m strong population spread about throughout roughly 2000 sq km of territory containing more than 7000 islands and 36,289 km of coastline. The widely dispersed lands of the archipelago nation pose significant and expensive challenges for businesses in the country, that continue to struggle with high transport costs brought on by the need to navigate the country’s numerous airports and seaports while land transit corridors also need development. A lack of resolve by both the public and private sectors has also allowed transport to languish, as large-scale infrastructure projects have stalled in favour of other priorities, leaving the country’s road, land and sea links to fall behind its regional competitors.
“The Philippines has severe infrastructure challenges, which makes it largely unprepared for the scale of growth of the economy,” Stefan Schmitz, CEO of Antrak Logistics, an international transport and logistics company, told OBG. “In the north of Philippines, there are national highways on the east and west coasts which serve as the main connection arteries, however, they cross every single large city in their path, passing through schools and business. This generates safety issues and delays in traffic flow. There needs to be an implementation of road safety to get people off the national highways.”
Turning Over A New Leaf
While underinvestment in previous years has left its mark upon the country’s transport network in terms of ageing, overly strained infrastructure, positive signs are now visible, as the government has begun to address the sector with renewed enthusiasm. Infrastructure budgets for the two key implementing agencies — the Department of Public Works and Highways (DPWH) and the Department of Transportation and Communication (DOTC) — have grown steadily in recent years, as the state has sponsored a host of much-needed big-ticket projects encompassing all modes of transport. These include integrated transport terminals, seaports, ferry terminals, a spate of airports, extensive road works and several new mass transit railway lines. “What could transform the country is a strategic long-term vision and roadmap which would guide the country’s development plans,” Doris Magsaysay Ho, president and CEO of Magsaysay Transport & Logistics, told OBG. “A strategic plan to develop production clusters around the country in well-selected agriculture and manufacturing sectors would then guide where hub, ports and logistics infrastructure should be located to help bring efficiency and lower costs.”
Federal budget allocations to the DPWH have increased more than three-fold since 2011 from P100.83bn ($2.2bn) to a total agency budget of P303.16bn ($6.7bn) in 2015, according to Department of Budget and Management.
This figure is set to increase another 39% in 2016 with the proposed allocation of P391.17bn ($8.7bn) for the year. Funding for the DOTC has shown equally dramatic growth trends, if not to the scale of the DPWH. New appropriations for the DOTC amounted to just P16.19bn ($354.4) in 2010 before roughly tripling to P46.93bn ($1.04bn) in 2015.
Out of all government agencies included in the 2015 national budget, the DPWH received the second-largest allocation and the highest year-on-year increase equivalent to a 37.9% bump from P219.9bn ($4.9bn) the previous year. Of this total, P185.8bn ($4.1bn) is earmarked for the completion of all national roads and major bridges by 2016, while other funds are being channelled into a bevy of ongoing new public-private partnership (PPP) projects including the Tarlac-Pangasinan-La Union Toll Expressway, the Daang Hari-SLEX Link Project, the NLEX-SLEX Link Connector, the Cavite-Laguna Expressway (CALAX), the Laguna Lakeshore Expressway Dike (LLED), and the NAIA Expressway. Meanwhile, the DOTC is financing its own various projects, such as P10.6bn ($235.3m) for the improvement of the country’s railway systems, including the rehabilitation and extension of Manila’s Light Railway Transit (LRT) Lines 1 and 2, and a subsidy for the Metro Rail Transit (MRT) 3 line, and P15.4bn (341.9m) for airports and seaports.
This recent surge in investment is the result of not only a critical need for improved infrastructure but is also due to the timing of financing schedules. More importantly, overseas funding from large donor organisations such as the Asian Development Bank and the World Bank are also based on timetables, some of which expire in 2016.
Not content with simply increasing its spending, the government is also looking to curtail some of the graft, political wrangling and legal delays that have plagued the development of large projects in the past by moving away from the traditional build-operate-transfer (BOT) approach and adopting a new PPP model. First implemented in 2010, the PPP model was launched in conjunction with the roll out of numerous high-profile infrastructure projects (the vast majority consisting of transportation builds) around the country, and was billed as a means to garner greater private sector participation and funding to assist the government in building necessary infrastructure without straining national finances. The PPP scheme, assisted by the government’s outreach arm of the PPP Centre, has become increasingly successful in this goal, with earlier projects drawing interest from Filipino companies and consortia backed by local conglomerates, while a much wider demographic cross section of international bidders has been represented in more recent tenders. “The private sector interest has been very encouraging,” Eleazar Ricote, deputy executive director of the PPP Centre, told OBG. “Of late, there are at least three major consortia participating in open and competitive tenders, now with partners from countries such as the UK, the US, Australia, Japan, Korea, the UAE and Spain. This is a positive result of the PPP road shows and investment promotion efforts and most importantly, a testament to international investors’ confidence.”
After coming off a slow start in the first few years, a total of 12 PPP projects have been awarded with a combined value of P200.48bn ($4.5bn), as of February 2016. A total of 41 projects valued at P1.14trn ($25.3bn) also remain in the pipeline in various stages of development, including 14 projects under procurement representing a combined total investment of P515.87bn ($11.5bn) and two projects totalling P95.96bn ($2.1bn) ready for implementation.
Of the 12 projects so far awarded, eight of them are transportation or transport infrastructure related. These include three expressway projects, the Daang Hari-SLEX Link Road, the NAIA Expressway (Phase II) and the Cavite Laguna Expressway; two urban mass transit rail projects, the automatic fare collection system and the LRT Line 1 Cavite extension including operations and maintenance; one airport project, the Mactan-Cebu International Airport passenger terminal building; the South Integrated Transport System Project; and the Southwest Integrated Transport System project.
“This PPP regime, and its various accomplishments so far, are major refinements to its predecessor BOT programme, particularly in the way that it engages private sector participation and interacts with them,” said Ricote. “Learning from international practices, we now have market sounding sessions and one-on-ones meetings with prospective private partners, thereby facilitating a more responsive approach to project structuring. This has been reinforced by recent policy instruments on improved PPP appraisal, alternative dispute resolution mechanisms, probity advisory, viability gap funding, monitoring protocols and so forth.”
As the PPP scheme continues to help shore up the country’s infrastructure, the government is similarly looking to bolster the PPP foundation from a legal standpoint to ensure continuity for the foreseeable future. The BOT Law, also known as the PPP Act of the Philippines through the amendment of Republic Act 7718, has faced a number of political delays in its passage as of early 2016, although it is expected to eventually be made into law. Ricote told OBG he was optimistic that the legislation would ultimately pass, and that the act would both formalise changes made to the PPP framework through executive orders since 2010 while also fortifying the PPP model against any changes in political landscape that could potentially threaten the PPP structure in the future.
Some of the enhanced legal and regulatory framework changes that are waiting to be formalised will include key policies formulated to address weaknesses under the current legal framework through the issuance of policy circulars. These include guidelines and procedures for the appraisal of PPP projects; pipeline development; a monitoring framework and protocols; termination payments; viability gap funding; probity advisory; and PPP best practices.
The act will also institutionalise a key PPP funding tool, the Project Development and Monitoring Facility (PDMF), a revolving pool of funds for engaging transaction advisors for PPP project preparation and transaction support, and independent consultants for monitoring of PPP project implementation. As of March 2016 the PDMF fund is supporting a total of 40 projects, including nine of the 12 awarded projects. The PDMF is composed of a panel of 22 national and international consulting firms from countries with advanced PPP economies such as Australia, Canada, France, Germany, the UK and the US, among others.
A significant portion of the PPP projects have been targeting Manila’s congested city streets through a variety of integrated solutions, including an expanded light rail service, automation and traffic controls, and the construction of various new expressways. The roadways of the National Capital Region (NCR) suffer from an lack of infrastructure maintenance and organisation, which leads to both delays and safety concerns.
The city’s gridlock reached such proportions that conditions gave rise to a public petition in September 2015, calling for the government to declare a state of emergency to address the issue. The petition garnered significant public support and special measures were taken in the same month when the government deployed 96 armed policemen from the Philippine National Police-Highway Patrol Group to help ease traffic along the busy EDSA thoroughfare at the six choke points of Balintawak, Cubao, Ortigas, Shaw Boulevard, Guadalupe and Taft Avenue.
Metro Manila was also given the ignominious title of hosting the “worst traffic on Earth” in 2015 by navigation application Waze in a global GPS-based study, with local residents posting the most minutes spent commuting from home to office with an average time of 45.5 minutes. Manila scored an underwhelming 0.4 out of 10 in the study, which was based on a 1-10 ranking system within six categories: the frequency and severity of traffic jams; quality of infrastructure; driver safety; road and weather hazards; access to driving fundamentals; access to cars and gas prices; and other drivers’ helpfulness. This ranked Manila behind even Jakarta, Indonesia and Rio de Janeiro and Sao Paulo in Brazil as well as last among the 167 metro areas polled.
According to a 2012 study entitled “Roadmap for Transport Infrastructure Development for Metro Manila and Surrounding Areas,” conducted by the Japan International Cooperation Agency in coordination with various Philippine government departments, traffic snarls cost the country P2.4bn ($53.3m) per day and could increase to P6bn ($133.2m) per day by 2030 if the problem continues unabated. This amounts to over $20bn per year in the greater Metro Manila area, equivalent to more than 10% of GDP. According to the study, which was released to the public in 2014, the average low-income group households spend a minimum of 20% of their monthly household income for transport, with these costs set to rise 2.5 times higher by 2030.
These estimates are likely conservative, as they do not factor in more recent indirect consequences of congestion such as the Metro Manila truck ban, which has been implemented intermittently for decades (see analysis). One 2014 study conducted by Citigroup estimated the economic cost of the ban at as much as $7.3bn, while putting approximately 1m manufacturing jobs at risk and constricting the country’s GDP by between 1-5% due to the impact on technology export commodities.
In response to this enduring problem the government has responded with a multi-pronged approach to ease traffic including an expansion of mass transit rail systems (see analysis), along with a proposed bus rapid transit system and a series of new expressways around the city and further afield. The first three of these projects awarded through PPP contracts include the P2.23bn ($49.5m) Daang Hari-SLEX Link Road, the P17.93bn ($398m) NAIA Expressway (Phase II) and the P35.43bn ($786.5m) CALAX Expressway.
The Daang Hari-SLEX Link Road (now the Muntinlupa-Cavite Expressway) was completed and operated by Ayala Corporation in conjunction with the DPWH in July 2015. It represents a recent success story with the 30-year concession period now under way.
Next up in the pipeline is the NAIA Expressway (Phase II) being built by a consortium composed of South Korea’s Daelim Industrial, Philippines’ DM Consunji and Vertex Tollways Development (a subsidiary of the Philippine conglomerate San Miguel). The project was 69% complete as of February 2016 in spite of being hit with a rash of delays stemming from right-of-way and utility posts relocation issues. The NAIA Expressway (Phase II) is planned for a July 2016 completion date. Upon completion the expressway will connect the capital’s main airports directly to the Entertainment City Manila casino complex, as well as to both the South Luzon Skyway and the Manila-Cavite Toll Expressway.
The final and largest commissioned project to date is the CALAX Expressway which was still in the pre-construction phase as of early 2016, after a contract to build the roadway was signed by Metro Pacific Investments Corporation Holdings in July 2015. The 35-year BOT contract involves the financing, design and construction, operation and maintenance of the entire four-lane, 44.63-km closed-system tolled expressway (the longest PPP roadworks project to date). Once completed, it will connect the Manila-Cavite Expressway in Cavite to the South Luzon Expressway in Laguna, thus providing a more convenient and faster route from Metro Manila to the Calabarzon Region, which includes Cavite, Laguna, Batangas, Rizal and Quezon.
In The Works
Other PPP projects in the procurement stages include: the P122.80bn ($2.7bn) Laguna Lakeshore Expressway Dike Project; the P29.54bn ($655.8m) Central Luzon Link Expressway Project (Phase II); P9.39bn ($208.5m) Plaridel Bypass Toll Road Project awaiting National Economic and Development Authority (NEDA) board approval; the P23.20bn ($515.04m) North Luzon Expressway East connector project awaiting NEDA board approval; and the project to upgrade and improve the Kennon Road and Marcos Highway. While the PPP projects are making headlines in securing many high-profile projects, numerous other smaller-scale roadworks are being carried out by other agencies. These include the $214m Wright (Western Samar) to Guiuan (Eastern Samar) rehabilitation road project, the P2.5bn ($55.5m) Arterial Road Bypass Project Phase II and the Northern Luzon Expressway extension. “New infrastructure and the development of roads will improve driving experience and safety for an increasingly mobile population. This, in turn, will fuel car rentals for business and leisure,” Rafael Lucila, president and CEO of Avis Philippines, told OBG.
The growth in the country’s population and subsequent demand for imported goods have put a strain on the Philippines’ port services (see analysis). In response to these trends, numerous port upgrades and improvements are in the works to boost capacity. However, problems persist, such as port congestion and a slow turnaround.
“The problem for shipping companies lies in the slowing down in the turnaround of ships, which affects profitability of operations, as shipping is a very capital-intensive business with high fixed costs,” Christian Gonzalez, Asia-Pacific head of International Container Terminal Services, told OBG.
While upgrades and capacity expansion of ports help with the amount of imports coming into the country, an insufficient infrastructure network connecting the country’s ports to metropolitan areas remains a challenge. “Port congestion has been an eye opener for the country and the industry as the Port of Manila handles over 75% of all container traffic in and out of the Philippines,” Daniel Ventanilla, general manager of NYK Line, an international shipping company, told OBG. “Whereas container traffic has grown, the road network leading to the Manila Port has had little to no development at all. Infrastructure to complement the Port of Manila, Batangas and Subic is needed, especially major development of road networks like the NLEX-SLEX connector and the NLEX Harbour Link.”
The Port of Manila – which refers to the collective terminals that serve the Manila area – has received significant investments to improve efficiency and capacity. Meanwhile, alternative ports, like Batangas and Subic, are being promoted by the government. “There needs to be a significant emphasis in infrastructure to decongest Manila, with emphasis on connecting the ports internally as well as to and from the North and South Luzon Expressways with elevated highways” Richard Barclay, CEO of Manilla North Harbour Port, told OBG. “The Philippine government has encouraged the Batangas and Subic ports as viable alternatives, however, there is an imbalance of sea trade in the country, with 60/40 in favour of imports into the Metro Manila area and not where the economic zones are. Therefore, Batangas and Subic, alone, do not solve the decongestion of Manila, even if they cater to the economic zones.”
While port investments could help boost logistics efficiencies, there is also potential for the country to develop a robust shipbuilding and ship repair industry. However, improvements in infrastructure and consistent quality of service are needed for the Philippines to become a bigger market player. “Ship repair is viable in the Philippines given the lower labour costs than in neighbouring countries, such as Singapore and Japan. However, shipowners may choose to repair their ships in markets where labour is more expensive because other risks, such as the availability of materials, presence of technical representatives and original equipment manufacturers, are less,” Terry Watkins, chairman of Subic Drydock Corporation, told OBG. “Cost is a major consideration, but shipowners also need to know that their vessels are going to be delivered on time, within the budget and with consistent work quality.”
Like road and sea traffic, air traffic to and from the Philippines remains robust in spite of the economic slowdown in some key emerging markets such as China. Although international travel into the major business and industrial hubs around the country continue to be driven by strong economic growth and to a lesser extent tourism, the extensive network of regional and other smaller airports around the country is particularly important for the island nation in terms of internal travel.
Air passenger traffic in the Philippines rose 1.6% in 2014 due in large part to the aggressive expansion of routes being undertaken by flag carrier Philippine Airlines (PAL) and Philippines-based budget airline Cebu Pacific, according to statistics from the Civil Aeronautics Board. The volume of air passengers in the country reached 38.27m in 2014, up 610,291 passengers from the 37.66m recorded in 2013 and nearly double the 18.76m passengers in 2006. International passenger traffic has been sustaining recent growth, registering a 3.4% rise to 17.92m in 2014 from 17.32m the previous year, while domestic passenger traffic was relatively unchanged at 20.35m in 2015 from 20.33m in 2013.
Much of this air passenger traffic growth comes from expansion to both eastern and western markets by airlines such as Turkish Airlines, Qatar Airways, Emirates and Etihad Airways. Domestic airlines, including PAL and Cebu Pacific are also in the midst of fleet and route expansions while also facing increased competition from a proliferation of low-cost carrier options.
Fleet expansion and air traffic by east-west-focused carriers has shown little sign of slowing, while regional Asian hubs continue to thrive in a climate of steady if not slightly slower economic growth. Emirates, for instance, increased its flights to the Philippines by 100% in 2013 and increased trips again by another 25% in 2015. A new bilateral labour agreement with Japan in 2015 caused another spike in traffic as well, while South Korea has also increased its linkages recently. All of this expanding international tourism and investment business is being further supplemented by prolific outbound traffic figures from the millions of overseas Filipino workers.
In a bid to better accommodate increased passenger flow at the primary Ninoy Aquino International Airport (NAIA) in Manila, as well as boosting capacity in major regional airports around the country, the government has begun to invest heavily in a complete makeover of the Philippines’ air infrastructure. New multimillion-dollar operations, development and maintenance PPP pre-qualification tenders were being prepared for no fewer than six airports at the end of 2015. The DOTC and Civil Aviation Authority of the Philippines are implementing the contracts, which includes the airports of: New Bohol (Panglao), with a P2.34bn ($52m) contract; Laguindingan, at P14.62bn ($324.6m); Davao, at P40.57bn ($900.7m); Bacolod, at P20.26bn ($449.8m); and Iloilo, with a P30.40bn ($674.9) contract.
In parallel with these upgrades, the connecting infrastructure to the country’s busiest airport is also in the midst of an overhaul. The most pressing issue within the air transportation market – one with implications ranging far beyond transport sector and into tourism, industry, services and virtually every other sector – is the glaring shortcomings of the capital city’s primary gateway.
Manila and the surrounding NCR is serviced primarily by NAIA, which has operated in one form or another since 1935 when flight operations began at the then-named Grace Park Airfield. In the ensuing eight decades the city’s population has swelled while international business and tourism visits have also exhibited stronger growth in recent years.
As a result the land and air capacities of the facility have been pushed to the breaking point, with limited road access and no rail connections, while the dual-crossed runways are also strained. The current situation has reached the point where a temporary spike in air traffic, such as the 2015 APEC Summit, results in the cancellation of thousands of regular flights to clear space for the event.
Although measures are being taken to alleviate the pressure on NAIA, the only feasible way to handle this increased traffic is the construction of a brand new airport in a different location. Numerous proposals have been discussed over the years with one of the most likely projects being an expansion of the Diosdado Macapagal International Airport (commonly referred to as Clark Airport from its origins as a one of the largest US overseas airbases) to the northeast of the city centre where a new airport built on reclaimed land in Manila Bay is proposed.
A separate potential solution including the use of Clark Airport is also being evaluated with a feasibility study on the matter due out in mid-2016. This includes the possibility of a dual airport solution that keeps NAIA carrying one half of the airport load, with additional traffic routed through the upgraded Clark facility. One of the major drawbacks to this dual airport plan is accessibility, with no railway links to either airport currently. Clark is also located approximately 80 km away from Manila city centre.
With either proposal, the prevailing mood up to 2015 has been to wait until a new president has been elected and a new government formed to allow for stability of a new six-year term with which to take the next important step forward in these developments. In the meantime, near-term solutions are serving as a stop gap to help alleviate some of the most pressing problems at NAIA. Terminal 1, for instance, has been recently refurbished. After years of litigation delays, the underutilised potential of Terminal 3 is now also being tapped with five of the largest international carriers – Delta, Singapore Air, KLM Royal Dutch, Cathay Pacific and Emirates – transferring their operations from the highly strained Terminal 1 to Terminal 3. On the airborne side of the equation, improvements have been made to make the most out of the limited existing runway space, including adding a new taxiway which will boost capacity by allowing aircraft to enter and depart the primary runways more quickly, as well as improved air traffic control measures to manage the crowded skies over the Manila region.
A more substantial revamp is also awaiting approval from the NEDA board in the form of a PPP project to be implemented by the DOTC and the Manila International Airport Authority. The P74.56bn ($1.7bn) project is intended to improve, upgrade and enhance the operational efficiencies of all existing terminals of NAIA. It is meant to cover both the land side and air side of the area, meeting the International Civil Aviation Organisation standards. A parallel project is also under a conceptual design pre-feasibility study stage to build an NAIA rail link to downtown Manila consisting of a 6.2-km spur line from the Baclaran Terminal Station of LRT-1 to Terminal Three along with four additional rail stations. The system would boast a projected capacity of 2800 passengers per hour, per direction or 40,000 passengers per day.
The Philippines’ long-neglected transportation system is in the midst of a major overhaul across all segments which should result in dramatically enhanced capacity and efficiency across the board. Strong financial commitments by the government, along with increased private sector participation through PPP programmes, looks to be providing the catalyst needed to get many of the long-discussed and much delayed big ticket infrastructure items off the drawing board and into the construction phase. With many of the large projects approved, the next government will be responsible for carrying over this momentum, a transition which should be eased by the anticipated passage of legislation codifying many of PPP changes already made. Once completed, the combined effect of these projects should reduce many of the substantial bottlenecks that have restricted the effectiveness and growth of the road, air and land transport and logistics routes that link the country to a host of rapidly growing regional and international trade partners.
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